Agricultural Finance Review

Volume 66, Number 2, Fall 2006 Special Issue

Biography

"Dr. Muhammad Yunus, Founder of the Grameen Bank and 2006 Nobel Peace Prize Recipient " authored by Calum G. Turvey and Rong Kong

Invited Papers

"An Overview of Recent Developments in the Microfinance Literature" authored by Valentina M. Hartarska and Martin Holtmann

Abstract

This paper presents an overview of microfinance and microfinance research. The objective is to show that microfinance research has come full circle: from policies to lending methodologies and to organizations in the 1990s, and back to a focus on policies. Specifically, developments in the theoretical literature on asymmetric information, transaction costs, contracts, and banking identify the challenges that MFIs must overcome. Recent trends toward intermediation and commercialization have brought about renewed focus on identifying appropriate policies to promote a viable microfinance industry. The paper concludes by describing some current challenges faced by the industry and offers a possible research agenda for agricultural economists.

Key words: financial institutions, microfinance, microfinance institutions, poverty, rural finance

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"Microfinance in Developing Countries: Accomplishments, Debates, and Future Directions" authored by Richard L. Meyer and Geetha Nagarajan

Abstract

This paper provides an overview of the microfinance industry in developing countries. It highlights the early development of the concept of microfinance and identifies some of the key issues and debates concerning its performance in terms of outreach, sustainability, and impact. Studies are summarized that report on industry performance by region. The frontiers for the industry involve broadening the range and diversity of services provided to existing clients and expanding services to difficult-to-reach populations, especially the remote, poorest, and the youth. In countries where the industry is still small and fledgling, the challenge is often one of addressing the problems of reaching people in remote and conflict-affected areas.

Key words: financial services, impact evaluation, microfinance, microfinance institution, microlending, poverty, remote populations, sustainability, youth

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Research

"A Comparative Review of Major Types of Rural Microfinance Institutions in Developing Countries" authored by Manfred Zeller

Abstract

This paper describes different types of rural microfinance institutions, and examines their comparative advantages as well as related challenges to and strategies for deepening rural financial systems. The focus is not about which type of institution is better or worse for a particular target clientele in a particular operating environment. Instead, one of the major recommendations of this study is that there is no blueprint for rural microfinance. Institutional diversity is desired to enhance competition, depth and breadth of outreach, and welfare impact.

Key words: agricultural development, financial sustainability, microfinance institutions, outreach, rural development, rural finance, savings and credit cooperatives, solidarity group lending, village banks

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"The Uganda Rural Farmers Scheme: Women’s Accessibility to Agricultural Credit" authored by Biruma M. Abaru, Amin W. Mugera, David W. Norman, and Allen M. Featherstone

Abstract

This study investigates factors related to loan approval, disbursement, repayment, and loan rationing among 1,012 farmers in the Rural Farmers Scheme (RFS), Uganda, between 1987 and May 1995. Results indicate that women had a higher loan approval rate and loan repaid/loan borrowed ratio than men, but lower actual disbursement levels. Loan rationing among women and men was not statistically different, and no justification was found for microfinance institutions discriminating against women in giving loans based on repayment rates. A wide gap exists between loan amounts approved and disbursed. Strategies are outlined for improving the pool of women loan applicants.

Key words: loan application, loan approval, loan disbursement, loan rationing, smallholder farming, women

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"Enhancing Microfinance Using Index-Based Risk-Transfer Products" authored by Jerry R. Skees and Barry J. Barnett

Abstract

While significant progress in microcredit and microfinance has been made in low-income countries, lending for small farming enterprises has been limited. This article reviews how innovative index-based risk-transfer products (IBRTPs) can be used to transfer the correlated natural disaster risks that often hamper the development of farm-level microcredit. By linking lending to IBRTPs, access to microcredit can be enhanced while also providing opportunities to offer mutual sharing of the basis risk that remains after correlated risks are transferred into global markets. This opens the way for new thinking about developing agricultural insurance in low-income countries.

Key words: agricultural finance, agricultural insurance, agricultural poverty, disaster risk management/mitigation, index-based risk transfer, microcredit, microfinance, microinsurance, rural credit markets

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"A Dynamic Model of Individual and Group Lending in Developing Countries" authored by Ani L. Katchova, Mario J. Miranda, and Claudio Gonzalez-Vega

Abstract

This paper examines the contract design problem of microfinance institutions seeking to maximize outreach to the poor while remaining financially sustainable. A dynamic model of group lending is developed that shows how optimal interest rates depend on information regarding moral hazard and adverse selection problems, correlated project risks, and strategic default. Relative to traditional static models, the results indicate a dynamic model better explains the current experience with individual and group lending in developing countries.

Key words: adverse selection, individual and joint liability contracts, microlending, moral hazard, strategic default

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"Making Loans to Make Friends: Explaining the Dismal Financial Performance of Financial Service Associations" authored by Andrew G. Mude

Abstract

This paper investigates the ways in which microfinance provision can unravel and yield perverse outcomes that run counter to its stated objective. It presents a theoretical challenge to the Stiglitzian notion that large endowments of social capital induce inexpensive peer-monitoring efforts which render jointly-liable contracts efficient. Reliance on a specific set of assumed community characteristics that often do not adequately represent the incentive structure facing borrowers and lenders grossly overestimates the efficiency of informal finance institutions. In particular, by focusing on Financial Service Associations, a specific form of microfinance institution, the effectiveness of such institutions is found to be very sensitive to the behavioral motivations of both clientele and provider, as well as the social norms upon which such transactions take place.

Key words: contract enforcement, microfinance institutions, social capital

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"Savings and Asset Allocation of Households in Uganda" authored by Barnabas Kiiza and Glenn D. Pederson

Abstract

The Government of Uganda has put in place the Plan for the Modernization of Agriculture as part of its poverty reduction program. That program incorporates the improvement of households’ access to formal financial services as one of its main components. To examine the program, this study uses primary data to determine the savings and portfolio allocation behavior of households with and without access to formal financial services. Findings reveal no significant difference between both types of households in the marginal propensity to save out of long-run income. The precautionary demand for liquidity and the desire to avoid risk are important factors shown to influence portfolio allocation decisions by households.

Key words: household savings, portfolio allocation, Uganda

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"Introducing Inventory Credit into Nigerien Agriculture: Improving Technology Diffusion" authored by Felix G. Baquedano and John H. Sanders

Abstract

A critical component of agriculture in developing countries is increasing soil fertility in response to depleted soils and declining crop yields. An inventory credit program was introduced in western Niger to generate savings for farmers’ groups to facilitate the purchase of inorganic fertilizers. This program is compared with a more traditional inventory credit program, which provides credit at harvest but lets farmers sell their grain in the post-harvest period after grain prices have recovered. The evaluation of the two programs for their impacts on farmers’ incomes and farm-level technology adoption is undertaken with a linear programming model. The decision-making framework of this model comes from interviews of farmers in a number of African countries. Farmers are found to be risk averse, but exhibit a different type of decision making than the usual expected income-income variability tradeoff.

Key words: fertilizer, inventory credit, Niger, risk aversion

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"Agricultural Production Credit Clubs in Armenia: Facilitating Investment Through Market Linkages, Social Capital, and Microcredit" authored by Hamish R. Gow, Aleksan Shanoyan, Lilya Abrahamyan, and Mariana Alesksandryan

Abstract

Armenia’s 1991 privatization and land redistribution process handed ownership and control of agricultural production to over 300,000 inexperienced, financially distressed, subsistence farmers operating extremely small fragmented plots, and the processing sector to similarly distressed managers. As seen elsewhere across Eastern Europe, the result was chaotic turmoil characterized by pervasive delayed payments, massive disinvestment, and rapid output declines. However, unlike elsewhere, Armenia could not rely upon the entry of FDI to correct channel incentives and revitalize its agricultural and rural financial markets. Instead, an alternative exogenous stimulus was required. This study analyzes the instrumental case of how a quasi-public third party, the USDA Market Assistance Program and Agricultural Production Credit Clubs, successfully imitated FDI-induced incentive structures through market linkages, social capital, and microcredit to establish economically sustainable marketing channels. The findings provide important insights into the design of market-linked microcredit programs.

Key words: Armenia, credit clubs, social capital

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